As inflation is spiking around the globe, it has affected China less than other countries. In May, China reported an inflation rate of 2.1 percent, far lower than other major economies such as the US (8.6 percent), Germany (7.9 percent) and Australia (5.1 percent in Q1). However, China’s inflation rate may rise later in the year, as there are factors that could lead to higher prices.
The impact of rising food prices in the global market is just starting to be felt in the domestic market. Since the Russia-Ukraine military conflict broke out in February, wheat prices in China have steadily increased. Combined with the impact of extreme weather conditions and price hikes in fertilizers, food prices will continue to rise this year, which will cause rising prices across a number of industries.
Global crude oil prices are still unstable. Although oil prices dropped slightly after the US and its allies released petroleum reserves, this will not change the upward trend in energy prices in the medium to long term. If more sanctions are slapped on Russian oil exports or the recovery in global tourism in the post-Covid era leads to increased demand in the aviation sector, oil prices will only increase more.
Domestically, devaluation of the Chinese yuan could lead to imported inflation. The Chinese yuan appreciated 11.3 percent from June 2020 to the end of 2021, which helped China offset the impact of rising commodity prices around the world. But in the two weeks between April 19 and May 5, 2022, the yuan devalued by 4.75 percent. As exchange rates continue to fluctuate, the risk of imported inflation remains.
Coal prices have increased and may continue to rise in the rest of the year. Amid global energy price hikes, the price of thermal coal as a major production material in China jumped by 48.3 percent from late February to late March. While the price fell back by 22.2 percent in late April, it was still considerably higher than last year. The price of thermal coal on global markets is much higher than in the domestic market, so coal imports have shrunk. As China has launched a huge policy package aimed at stabilizing economic growth which will lead to increased demand for coal, this will again drive up coal prices and overall inflation.
There are signs that the rise in the Producer Price Index (PPI) in China will translate into a rise in the Consumer Price Index (CPI). The manufacturing sector can no longer absorb last year’s hikes in commodity prices and will be forced to increase the price of their products, which will mean a higher CPI.
Finally, pork prices are expected to rise once again. Due to a mismatch between supply and demand, pork prices have been in a prolonged slump, but analysts believe pork prices will rise in June or July by as much as 40 to 60 percent, driving inflation up by the end of the year.
The Chinese government has identified rising inflation as one of its major issues to tackle. To stabilize inflation, China needs to provide strong support for food production, including offering subsidies and favorable loans to farmers to ensure adequate supply of agricultural products. In the energy sector, China should encourage State-owned firms to utilize more coal production capacity and increase the efficiency of energy production and consumption across economy. In the meantime, there should be increased policy support for new energy.
China announced in March that it will implement value-added tax (VAT) credit refunds worth 1.5 trillion yuan (US$223.2b) to keep the operations of market entities stable and maintain job security. It also announced it would cut the amount of taxes and fees business pay by 1 trillion yuan (US$148.8b). In addition, China should seek to expand international trade opportunities.
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